Indian Metals and Ferro Alloys' (NSE:IMFA) Performance Is Even Better Than Its Earnings Suggest

Indian Metals and Ferro Alloys Limited's (NSE:IMFA) strong earnings report was rewarded with a positive stock price move. Our analysis found some more factors that we think are good for shareholders.

View our latest analysis for Indian Metals and Ferro Alloys

A Closer Look At Indian Metals and Ferro Alloys' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2024, Indian Metals and Ferro Alloys had an accrual ratio of -0.14. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of ₹7.0b in the last year, which was a lot more than its statutory profit of ₹4.33b. Indian Metals and Ferro Alloys' free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Indian Metals and Ferro Alloys.

Our Take On Indian Metals and Ferro Alloys' Profit Performance

As we discussed above, Indian Metals and Ferro Alloys has perfectly satisfactory free cash flow relative to profit. Because of this, we think Indian Metals and Ferro Alloys' earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at 27% per year over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. In terms of investment risks, we've identified 1 warning sign with Indian Metals and Ferro Alloys, and understanding it should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Indian Metals and Ferro Alloys' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.